What Investors Need to Know About Frasers Logistics and Industrial Trust’s Foray Into Europe

Frasers Logistics and Industrial Trust(SGX: BUOU) recently announced that it would be acquiring 21 properties in Germany and the Netherlands. Here’s a quick rundown on some of the details of the proposed transaction.

A reasonable purchase price

The acquisition is for 17 properties in Germany and four properties in the Netherlands for a purchase price of €596.8 million (S$972.8 million). The purchase price is a 1.2% discount to the actual appraised value of the properties of €603.9 million (S$984.4 million). After accounting for existing debt facilities of €262.7 million (S$428.2 million), the final purchase consideration price is €316.2 million (S$515.4 million).

The transaction will be funded by equity fundraising through a private placement of new units (has been fully subscribed), non-renounceable preferential offering of new units to existing unitholders, and borrowings.

Strong line-up of properties

The 21 target properties have a few desirable characteristics that investors might like.

Firstly, all the properties have been fully leased-out to a total of 20 different tenants and have a long weighted average lease expiry (WALE) of eight years. The WALE is the average length of time before the tenant leases expire. A WALE of eight years is considerably long, which means the REIT can be assured that it will continue to receive rental income on the properties for the foreseeable future.

Another major positive I like about the lease contracts is that 89% of them have CPI-linked indexation or fixed escalation. This means that we should see an annual increase in rental income over the next few years.

Finally, the properties are predominantly freehold and have an average age of just seven years. Consequently, the REIT does not have to factor in additional capital requirements for any asset enhancements for the foreseeable future. Moreover, freehold land is more like to appreciate in value over the long-term.

Diversifying its portfolio

Currently, Frasers Logistics and Industrial Trust has a portfolio of properties located solely in Australia. The proposed acquisition will enlarge its geographical footprint and reduce its concentration risk. After the acquisition, the trust’s proportion of assets in Australia will be reduced to 67%, with Germany making up 25% and the Netherlands contributing 8%.

The enlarged portfolio also means that the rental income from its top 10 tenants will be reduced from 41.5% to 35.2%, reducing its customer concentration risk substantially.

Effects on DPU and Gearing

The trust’s management has also said that based on pro forma financial results of the first quarter of 2018, the acquisition of the new properties will increase distribution per unit (DPU) by 1.7%. This is after taking into account the enlarged unit base due to the equity fund-raising.

Meanwhile, the trust’s gearing will increase to 36.8% from 30.9%. This is still well within regulatory limit of 45% and gives the trust ample wriggle room for further acquisitions in the future.

What’s next?

Before making a decision on whether to take up the non-renounceable preferential offering of new units, existing unitholders should assess the price of the new units and whether it makes sense for them to increase their holdings in the REIT.